AWS-3 spectrum auction primer: What you need to know before the bidding starts

By Phil Goldstein

After years of buildup and preparation, on Nov. 13 the FCC will formally kick off Auction 97, better known as the AWS-3 auction. It will be the largest and most consequential auction of airwaves since the 700 MHz auction in 2008.

The auction will be focused on two different blocks of spectrum, and the commission has set a total reserve price of $10.587 billion for the AWS-3 auction. The first block of airwaves is the 1695-1710 MHz band, which will be unpaired spectrum used for low-power uplink operations and has a reserve price of $580 million.

The second set of airwaves is the 1755-1780 MHz band, which will be licensed for low-power uplink operations and will be paired with the 2155-2180 MHz band. The paired bands have a reserve price of $10.07 billion. The 2155-2180 MHz band is unencumbered by federal users, and will be used for downlink operations. The thorniest part of the auction process will likely be relocating government users from the spectrum or having carriers share the spectrum with government users. The National Telecommunications and Information Administration has a transition plan for those processes.

The spectrum up for grabs is mid-band spectrum and has a mix of the strong propagation characteristics of low-band spectrum and the ability to produce high amounts of capacity for dense areas that high-band spectrum affords. Indeed, Verizon Wireless (NYSE: VZ), T-Mobile US (NYSE:TMUS) and to a lesser extent AT&T Mobility (NYSE: T) are all employing the nearby AWS-1 spectrum for their respective LTE services.

According to the FCC's public fact sheet on the auction, 1,614 licenses in total are going to be auctioned. All but one of the spectrum blocks are going to auctioned off in 176 Economic Area (EA) licenses, which are the largest-sized geography for spectrum licenses. Those licenses will likely be bid on heavily by the larger carriers and companies participating in the auction. One block of spectrum will be licensed in 734 Cellular Market Area (CMA) licenses, the smallest license size in terms of geography. Many smaller and regional carriers are expected to bid for those licenses.

The AWS-3 auction will have two sub-bands, each with its own band plan:

  • One of the sub-bands consists of one unpaired 5 MHz block (1695-1700 MHz) and one unpaired 10 MHz block (1700-1710 MHz), licensed in EA geographies.
  • The other sub-band consists of paired spectrum. It includes one 5x5 MHz block (1755-1760 and 2155-2160 MHz) licensed in Cellular Market Area (CMA) geographies.
    There are also two 5x5 MHz blocks (1760-1765 and 2160-2165 MHz, and then 1765-1770 and 2165-2170 MHz) licensed in EA geographies. And finally there is one 10x10 MHz block (1770-1780 and 2170-2180 MHz) licensed on an EA basis.

Add all of that up and 65 MHz of spectrum is going to he be auctioned. Who is going to bid? Who is going to win? And how much money are they going to spend? FierceWireless has compiled a handy primer to consult as the auction gets underway.

Which companies are bidding?

At the end of October the FCC said 70 entities had been certified as qualified bidders for the AWS-3 auction. A few of the entities are obvious and explicit--AT&T Wireless Services, Cellco Partnership d/b/a Verizon Wireless, T-Mobile License and  VTel Wireless, for example. However, many other bidders have obscured their identities through bidding vehicles.

Thankfully, Hogan Lovells, a Washington law firm that specializes in telecommunications and represents clients before the FCC, went through the applications of all 70 qualified bidders and tracked down their ownership structures. The law firm's list is illuminating.

For example, 2014 AWS Spectrum Bidco Corporation is backed by TerreStar, wireless investment firm Jarvinian and its managing director John Dooley; Advantage Spectrum is controlled by U.S. Cellular (NYSE:USM); American AWS-3 Wireless is backed by Dish Network (NASDAQ: DISH); Dish is also backing Northstar Wireless and SNR Wireless (and has disclosed joint bidding arrangements with them). Meanwhile, foreign carriers are also getting into the mix. Docomo Pacific is backed by Japanese operator NTT DoCoMo and Puerto Rico Telephone Company has the backing of Latin American juggernaut América Móvil.

Smatterings of smaller carriers are bidding, including Bluegrass Wireless; Central Texas Telephone Investments (backed by the Central Texas Telephone Cooperative); Michigan Wireless (backed by Hilbert Communications); Sagebrush Cellular; and SI Wireless. There are also six individuals who are bidding. Even the city of Ketchikan, Alaska, which does business as KTU Telecommunications, is getting into the act. However, most analysts expect the majority of the bidding to be dominated by Verizon, AT&T, T-Mobile and Dish.

Why is Sprint not bidding?

One notable exception among the list of AWS-3 bidders is Sprint (NYSE: S), which indicated in September that it would not participate in the auction. At the time, Sprint said it would "continue to evaluate the opportunities presented by the upcoming 600 MHz incentive auction." For the time being, Sprint will be relying on its 800 MHz, 1900 MHz and vast roves of 2.5 GHz spectrum to expand and improve its LTE network. Sprint has 120 to 150 MHz of 2.5 GHz spectrum in the top 100 markets.

New Street Research analyst Spencer Kurn said that, essentially, Sprint has enough mid-band and high-band airwaves to support data traffic on its network. He also estimated that Sprint will need to raise $12 billion over the next couple of years to fund operating losses and spectrum purchases in the upcoming incentive action of 600 MHz broadcast TV spectrum. "They have a deep spectrum portfolio of mid- and high-frequency [spectrum] already," he said. "I think it's probably a better use of their capital to just save it for now" and not participate in the AWS-3 auction.

Indeed, Sprint may have a leg up on AT&T and Verizon in the upcoming 600 MHz incentive auction. Sprint, like T-Mobile and other smaller carriers, will be able to bid on up 30 MHz of reserved spectrum in the incentive auction in many markets across the country, as the FCC's rules currently stand. There are no such restrictions in place for the AWS-3 auction, meaning it will be much easier for Sprint to secure the low-band spectrum it actually needs in the incentive auction than by rolling the dice in the AWS-3 auction for spectrum that it doesn't need as much.

How much money is likely going to be raised from the auction?

That is the $10.587 billion question. And the answer to it depends on who you ask. Analysts diverge on how carriers will value the spectrum. Looking to past auctions gives some idea of the ballpark figures we can expect. For example, the 700 MHz auction in 2008 raised $18.9 billion in net winning bids, but that spectrum has much better propagation characteristics than AWS-3, and Verizon and AT&T bid high to get nationwide holdings that they have since used to deploy LTE service. The 2006 AWS-1 auction is more analogous, since AWS-1 radio waves are near the AWS-3 licenses. The AWS-1 auction, Auction 66, raised a total for $13.7 billion in net winning bids. 

So how much will the AWS-3 auction net? TMF Associate analyst Tim Farrar said that the reserve price was set to ensure that the FCC raised enough money to cover relocation costs for government users of the spectrum, as well as ensure that at least $7 billion was raised to cover the amount mandated by Congress to pay for the First Responder Network Authority (FirstNet) public-safety LTE broadband network.

The NTIA reported in May that the total estimated relocation or sharing costs for the 1695-1710 MHz band will be around $527 million and that the total relocation costs for the 1755-1780 MHz band will be around $4.57 billion.

The FCC has already raised $1.56 billion from the 1900 MHz PCS H Block auction, so the FCC needs at least an additional $5.5 billion for FirstNet. Farrar said that if the FCC exceeds the reserve price by a great deal in the AWS-3 auction, that relieves pressure on the commission to raise money for FirstNet in the 600 MHz incentive auction.

Farrar estimates that bids for the 1695-1710 MHz uplink band will only raise $1 billion to $1.5 billion, valuing it at $0.20 to $0.30 per MHz-POP. He said he values it that low because it is uplink spectrum, which is generally considered less valuable than downlink spectrum, and because it is encumbered by government users. Farrar thinks the 1755-1780 MHz band paired with the 2155-2180 MHz band will fetch anywhere from $11 billion to $14 billion, for a $12 billion to $14 billion total haul in the auction. Farrar values the paired spectrum at no more than $1 per MHz-POP.

Others think the auction could raise more money. BTIG analyst Walter Piecyk said he thinks the paired spectrum blocks will likely fetch $0.75 to $1.25 per MHz-POP, which works out to a range of $11.85 billion to $16.35 billion. However, Piecyk said he thinks the total will be more toward the lower end of that range "given the limited number of bidders and number of spectrum blocks out there." Piecyk thinks only Verizon and AT&T will be seriously bidding for 10x10 MHz blocks of paired spectrum. He said he did not have an estimate for how much the 1695-1710 MHz block would raise.

New Street's Kurn thinks both Verizon and AT&T will want to secure a 10x10 MHz block of paired spectrum, and based upon recent secondary market spectrum transactions that New Street has analyzed, the firm thinks each of those blocks will go for $1.50 per MHz-POP, which works out to $9.57 billion for each 10x10 MHz block. Ultimately, New Street thinks the auction could raise as much as $22 billion.

What will the bidding strategies be?

A big unknown wild card is what Dish and its chairman, Charlie Ergen, will do in bidding. Farrar said most bidders will be looking to acquire licenses as cheaply as possible, but that the real game will be about watching the interplay between Verizon, AT&T, T-Mobile and Dish. "Ultimately, the major part of the expenditure is going to be driven by the big players," he said. "The actions of Dish will go a long way to determining whether this all ends somewhere not very far above the reserve price or whether it goes quite a bit further."

Ergen has an incentive to bid up the price of spectrum and ensure that Verizon and AT&T, especially, are not going to underpay for the airwaves, analysts said. "Dish has every incentive make everyone pay full price," Kurn said. Rising prices for spectrum also could enhance the value of the mid-band spectrum Dish already holds.

At the same time, a key question is whether and how much Verizon, AT&T and T-Mobile will call Ergen's bluff, and leave Dish with spectrum he bid up in price--or outbid him for spectrum they need more than Dish might. "There are not examples I'm aware of where Ergen has been irrational in the price he is willing to pay for an asset," Piecyk said.

Dish's 40 MHz of AWS-4 spectrum runs from 2000-2020 MHz (for the uplink) and 2180-2200 MHz (for the downlink). Dish asked the FCC to let it use the 2000-2020 MHz band for downlink operations instead of uplink as a condition for agreeing to bid the reserve price in the H Block auction. Dish tried and failed ahead of the AWS-3 auction to mandate that AWS-3 spectrum interoperate with AWS-4, and so his bidding could reflect a desire to get that accomplished after the auction ends.

"Winning some AWS-3 spectrum increases pressure of AWS-3 to interoperate with AWS-4 he owns and controls," Piecyk said. "But I'm not sure that means Ergen has to purchase an AWS-3 spectrum position."

Farrar said that if at least two players want 20 MHz or more then the auction could end with everyone getting what they want: Verizon and AT&T with 20 MHz each, T-Mobile with 10 MHz and Dish potentially with nothing, but having bid prices higher.

"I don't think he [Ergen] needs to walk away with anything," Kurn said. "I never thought of Ergen as someone who paid market value for anything. He always demands margin of safety or a discount."

On the other hand, Kurn said that both Verizon and AT&T "absolutely" need to secure 10x10 MHz blocks for future spectrum needs. "At this point there's probably not much significant value for a major operator to get anything less than a 10x10 spectrum position," Piecyk noted.

T-Mobile likely wants enough AWS-3 spectrum to be able to have 20x20 MHz channels nationwide using AWS spectrum. Kurn estimates there is about a third of the country where T-Mobile doesn't yet have enough spectrum to do that, and so T-Mobile will likely try to bid for 10 MHz of spectrum over a third of the country.

Smaller carriers and investors without the deep pockets of the major bidders are likely going to be focused on areas where the spectrum is divided into CMA areas. That means smaller carriers will be able to acquire licenses in areas closer to where their actual customers and service areas are.

Clues to watch for

Farrar said a key development to watch for is how many simultaneous bids there are on the large licenses, especially in the first few days. That will give a good sense of the trajectory of the bidding and whether Verizon, AT&T, T-Mobile and Dish are holding back at all.

As the FCC explains, one rule of the auction "requires bidders to bid actively throughout the auction, rather than wait until late in the auction before participating." According to the FCC, a bidder that wants to maintain its bidding eligibility would be required to be actively bidding on licenses representing at least 80 percent of its current bidding eligibility during each round of the first stage of the auction. Farrar said that means companies will need to keep bidding every time they lose, increasing the pressure to have multiple bids simultaneously. If there are not multiple simultaneous bids then that means no players are looking for large spectrum positions, he said.

Another clue will be seeing how many companies bid for the 1695-1710 MHz band. It is unpaired uplink spectrum and not as highly prized as the paired spectrum, analysts say, but could still provide value to whichever firms end up controlling it.

Finally, it will be interesting to see how many smaller carriers line up for the CMA-sized licenses--and what other entities besides carriers bid. In the H Block auction, Farrar noted that investment firms were willing to spend $50 million to $100 million for licenses that Dish ultimately won. Farrar said that during the H-Block auction investment firms did not bid high amounts, and that it's unclear whether there are firms outside of wireless carriers and Dish that are willing to spend billions on spectrum.

AWS-3 spectrum auction primer: What you need to know before the bidding starts